FCC Reduces the Clearing Target Price for Incentive Auction

The U.S. telecom regulator, Federal Communications Commission (FCC), recently reduced the clearing target price of the ongoing 600 MHz low-band wireless spectrum auction, popularly known as the Incentive Auction. At present, the regulatory body is going through the stage 2 of the second part of the auction.

Stage 1 of the second part of the Incentive Auction witnessed total bids worth $23 billion after the twenty-seventh round of bidding. Notably, the FCC’s first Final Stage Rule was that the minimum bid total should reach $15.9 billion for the spectrum auction to continue.

The Incentive Auction, which was initiated by the FCC on Mar 29, 2016, completed its first part in Jul 2016. This part was essentially a reverse auction in which, the airwaves were freed by TV broadcasters who no longer had any productive use of the same. The TV broadcasters had agreed to free substantial spectrum of 126 MHz for a massive $86.4 billion.

Per the Final Stage Rule of the FCC, proceeds from the forward auction (net of bidding credits and impairment discounts) must be sufficient to cover Incentive Auction costs. These costs include the aggregate of broadcaster clearing costs, approximately $226 million to cover the FCC’s costs for conducting the auction and $1.75 billion for the TV Broadcaster Repacking Fund. Accordingly, the forward phase of the Incentive Auction must generate $88.4 billion for the whole process to be successful.

In stage 2, the FCC reduced the event clearing spectrum size to 114 MHz instead of 126 MHz fixed earlier. However, 99.6% of the spectrum offered in this stage will be completely unimpaired compared with 97% of that offered in the first stage.

Consequently, the auction clearing target price has also been lowered substantially to $54.6 billion from the initial target price of $86.4 billion. Importantly, during this stage of the bidding process, the FCC is negotiating with TV broadcasters to determine the amount of spectrum they will release to the “forward” portion of this event and the price of the same.

The FCC has received as many as 62 applications for the second part of the Incentive Auction. All 62 bidders have made upfront payments. Important bidders include national telecom giants Verizon Communications Inc. VZ, AT&T Inc. T, and T-Mobile US Inc. TMUS and cable MSOs (multi-service operators) Comcast Corp. CMCSA. All these stock currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Additionally, satellite TV operator DISH Network Corp. DISH, which already has a strong portfolio of spectrums, is also taking part in the bidding process. Low-band spectrum is essential for wireless operators as the signals can be transmitted over longer distances and through brick-and-mortar walls in cities. However, several industry experts believe that telecom operators may be unwilling to shell out such a hefty sum for low-band airwaves.

Some industry watchers have also predicted that telecom operators might need around 70 MHz to 80 MHz of spectrums in the 600 MHz bands instead of the total freed up 126 MHz airwaves. In such a scenario, the FCC might have to conduct another round of reverse auction for a reduced volume of spectrum at lower prices.

The FCC was initially hopeful of completing the Incentive Auction process by the end of the third quarter of 2016. However, industry watchers are now anticipating it to be more prolonged and it is likely to continue till early 2017. Notably, the freed spectrums cannot be utilized commercially before 2020.

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